1. One of the core principles of economics is that markets are a good way to org
ID: 1142067 • Letter: 1
Question
1. One of the core principles of economics is that markets are a good way to organize economic activity. Markets feature buyers and sellers, each who seek to maximize the ben- cfit of buying or selling a commodity. For buyers, the marginal benefit of buying can be represented as a demand function (Qp). For sellers, the marginal benefit of selling can be represented as a supply function (Qs). The market is a mechanism whereby the marginal benefits for both sellers and buyers is equilibrated whereby each realizes the best possible outcome. College are as follows: Suppose the market demand and supply of textbooks, respectively, at Morehouse Qp 50-P Qs150 +4P where P is the market price of textbooks. a. At what price will textbooks sell for? How many textbooks will be sold? b. Suppose that there is an increase in the number of textbook sellers such that at a zero market price, market supply is minus 50 textbooks. At what price will textbooks sell for? How many textbooks will be sold? What do you conclude about the effect of an increase in supply on price and quantity? c. Suppose that there is an increase in the demand for textbooks such that at a zero price, the quantity demanded in the market is one hundred. At what price will textbooks sell for? How many textbooks will be sold? What do you conclude about the effects of an increase in demand on price and quantity?Explanation / Answer
(1)
(a) In equilibrium, QD = QS.
50 - P = - 150 + 4P
5P = 200
P = 40
Q = 50 - 40 = 10
(b) From original supply equation, when P = 0, QS = - 150 (Horizontal intercept)
Linear supply equation is: Q = a + bP
When P = 0, Q = - 50
- 50 = a + 0
a = - 50
Supply equation: QS = - 50 + bP
When P = 0, QS = - 50 (new horizontal intercept)
This means that supply curve has shifted rightward by 50 units at every quantity with same slope. New supply function therefore will be
QS = - 50 + 4P
Equating QD with new QS,
50 - P = - 50 + 4P
5P = 100
P = 20
Q = 50 - 20 = 30
Therefore, price has decreased by (40 - 20) = 20 and quantity has increased by (30 - 10) = 20.
(c) From original demand equation, when P = 0, QD = 50 (Horizontal intercept)
Linear demand equation is: Q = c - dP
When P = 0, Q = 100
100 = c - 0
c = 100
Demand equation: QD = 100 - dP
When P = 0, QD = 100 (new horizontal intercept)
This means that demand curve has shifted rightward by 100 units at every quantity with same slope. New demand function therefore will be
QD = 100 - P
Equating new QD with original QS,
100 - P = - 150 + 4P
5P = 250
P = 50
Q = 100 - 50 = 50
Therefore, price has increased by (50 - 40) = 10 and quantity has increased by (50 - 10) = 40.
NOTE: As per Answering Policy, first multi-part question has been answered.
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